Insurance can seem like an annoying expense – until you need it.
Insurance acts as a lifeboat to protect you against unexpected events. It can keep you from sinking if you’re in an auto accident, suffer a health crisis, or are a victim of identity theft.
It doesn’t always come cheap, but if you find yourself in a severe predicament, not having insurance could transform a difficult situation into a financial nightmare.
But with so many different types of insurance available, how do you know what kind is really necessary?
7 Types of Insurance and When You Need Them
There are a few different classifications of insurance. When it comes to choosing the kind you need, the best plan is to prepare ahead of time. That way you’ll know which policies deserve a place in your budget.
According to the Institutes Insurance Research Council, one in eight drivers doesn’t carry auto insurance even though most states require it.
Not only is having auto insurance a legal requirement, but it can also protect you financially as well. The Insurance Information Institute reports the average auto claim liability was $3,638 in 2017. Imagine paying that out of pocket.
If you’re looking to buy auto insurance, three basic types come into play:
Liability: This is the standard coverage that protects injuries or property damage if you’re in a fender-bender. The minimum amount of coverage varies by state. Be sure to check with your insurance agent to find out how much you need.
Collision: When your car suffers any kind of damage, this coverage pays for repair or replacement costs for your vehicle. It’s usually a requirement if you take out a loan to finance your car.
Comprehensive: Mother nature can wreak havoc on a vehicle, but this level of insurance covers damage from flood, hail, or fire. It can also protect against theft or vandalism.
Unfortunately, your landlord’s home insurance doesn’t cover your belongings in a rented space. That’s why you need renters insurance. It’s one of the more affordable types of insurance available and offers massive amounts of protection.
If the place you’re renting has a fire, flood, burglary, or other types of disaster, you’ll want some help replacing your lost or damaged items. If a family member or friend injures themselves while at your home, renters insurance can protect you against personal liability as well.
Renters insurance is also helpful for unusual circumstances, like if your washing machine malfunctions and floods your laundry room. If this happens to you, renters insurance could save you tens of thousands in out-of-pocket costs.
Buying a home is likely one of the biggest purchases you’ll make in your lifetime. It makes sense to protect that investment with hazard insurance, more commonly known as homeowners insurance. Homeowners insurance covers against fire, hail, theft, and other common hazards.
With a typical hazard policy, only your dwelling is protected. Extending your coverage to include personal belongings, secondary structures on your property, and personal liability offers more comprehensive coverage.
Keep in mind that hazard insurance doesn’t cover all natural disasters. You may need additional or separate coverage to protect against earthquakes or flooding.
This is one of the most neglected types of insurance, and also one of the most important.
According to a 2018 survey, more than 40% of people had no life insurance. No one likes to talk about death, but the reality is that everyone passes away eventually. If your family relies on you as a source of income, how would they continue to pay the mortgage, utility bills, or other monthly expenses in the event of your passing?
There are a few different types of life insurance, but in general, a life insurance policy can help the ones you love recover financially if you pass unexpectedly, and it doesn’t need to be expensive. A small term policy to help pay off your debt and cover funeral and burial expenses is generally very affordable.
Medical costs are on the rise. Blue Cross Blue Shield reports prescription drug prices will rise 136% by 2025. One broken bone or hospital stay can impact your finances for years or even decades.
Without your health, you might not be able to work. If you’re not insured, you miss out on lost income, and you could even end up in debt due to medical expenses. These days, you can’t afford to not have health insurance.
The first place to look for health insurance is your employer. Many companies offer health insurance benefits to full-time and sometimes part-time employees. If you’re married, be sure to compare policies between employers to see who can be covered, as well as which co-pays, deductibles, premiums, and coverages make the most sense.
If you’re self-employed or your employer doesn’t offer health insurance, you’ll need to look for a policy elsewhere. You can speak with an insurance agent directly or explore the federal healthcare marketplace to learn about your coverage options.
If you’re generally in good health, don’t take regular medication, and rarely see a doctor, consider a policy that covers only major medical. It tends to be less expensive than more comprehensive coverage.
If you suffer an injury, whether it’s from an accident or a medical condition, how long could you support yourself financially? The answer generally depends on the size of your emergency fund and whether or not you have disability insurance.
According to a study from the Federal Reserve, the average American would have to borrow money or sell personal belongings to cover an unforeseen expense of just $400. Without disability insurance, someone in this position is just asking for trouble.
Policies vary significantly from one provider to another. To make sure it’s worth your money, review your policy options carefully.
Identity Theft Protection
Even the most careful consumer can be a victim of identity theft. Data breaches are increasingly common, and hackers frequently attempt to break into the payment systems of national retail stores. Sometimes they succeed, and your information can fall into the wrong hands.
Monitoring your credit is the best protection. Coverage for identity theft can do that and alert you to suspicious activity. If you are a victim of fraud, it could take years to clean up if someone opens a credit card in your name or files a false tax return. Having protection against identity fraud can help you recover faster and more thoroughly.
Reasons Why You Might Need Extra Insurance
Life rarely goes the way you plan it. Even with the best of intentions, it’s possible to end up in a situation where insurance is the only thing shielding you from disaster.
To Protect Yourself from Unforeseen Events
If car crashes, health problems, and deaths were predictable, you might not need insurance. But accidents happen when we least expect them. Even the safest driver can get in a wreck, and the healthiest person can still face a medical crisis.
That’s what insurance is for. It offers financial protection to help you and your family when life throws you a curveball.
You Don’t Have Much Savings Set Aside
Generally, savings aren’t enough to sustain you or your family for a lifetime. An emergency fund is great for getting you through short-term events like job loss or a major home repair, but that won’t typically last you past three to six months. It’s very unlikely you’ll ever save enough to cover a lifetime of expenses.
If you pass unexpectedly, have a medical crisis, or lose all your belongings in a flood or fire, insurance can help. It gets you the money necessary to stay on your feet.
Reasons You Might Not Need Extra Insurance
On the other hand, not everyone’s insurance needs are the same. In some situations, extra insurance coverage might not be necessary.
You Have a Large Emergency Fund
Depending on just how large your emergency fund is, you might not need extra insurance. For instance, short term disability insurance tends to cover a period of three to six months. If you have enough savings to make it that far without a significant financial impact, you might not need it.
Having a large emergency fund could also reduce the amount of coverage you need. Without any debt or dependents relying on your income, forgoing life insurance could be a realistic option. However, you’ll still want to be completely sure your savings is enough to cover the cost of your funeral arrangements.
You Expect to Receive a Significant Inheritance
The purpose of insurance is to protect you financially from unforeseen events. If you’re expecting a large inheritance, you might not need as much protection as the average person. You can probably forego on certain types of insurance.
Some insurance is mandatory, like auto insurance in all U.S. states except New Hampshire. Up until recently, health insurance was essential under the Affordable Care Act. Starting in 2019, having qualifying health coverage isn’t a requirement, and a penalty fee won’t apply if you don’t have it.
If you’re expecting an inheritance, it’s a good idea to have the coverage you need in place until the cash is in your hand. That way, you’ll avoid an unnecessary financial burden.
Which Types of Insurance Are Right for You?
Life is full of surprises. Some, like marriage, a new job, or a new baby, come with great joy. Others, not so much. When life throws you a curveball, it’s essential to have the right financial protections in place.
The type of insurance coverage that’s essential for you depends on your situation. It’s easy to know whether or not you need renters insurance, but choosing how much auto, health, or life insurance coverage to buy is more difficult. For auto insurance, check with the laws in your state. For everything else, consider the level of risk you’re willing to live with.
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